During the recent controversy over the Susan G. Komen foundation declaring Planned Parenthood ineligible for breast cancer screening grants, Komen has been frequently criticized for allegedly allocating excessive funding to administrative costs and executive salaries, and insufficient funding to cancer research and health services. Administrative overhead provides a number that’s very easy to wield against almost any major organization. It’s trivial to point out that a lot of money goes toward management and advertising, and claim that it should have been spent on actually providing services to people. Instead of paying for fundraisers and marketing, they should be funding scientific research. So why would they direct any of their resources away from these initiatives? Clearly, they’re just being greedy.
This line of reasoning is easily understandable by everyone, and it’s also completely wrong. As a measure of an organization’s efficiency in funding certain initiatives, this tells us almost nothing. The implication is that the proportion of their expenses which doesn’t go directly to providing services is unacceptably high. But this conclusion can’t be justified simply by citing a number like 20% or 25%. Expecting that an organization should put all of its funding toward actual services, or even as much of its funding as is technically possible, demonstrates a stunning nearsightedness about financial planning. Such organizations must acquire their funding somehow. They have to manage how that funding is used, ensure a continued supply of funds, and defend against any possible threats to their organization. They need to make decisions about what they do. They need to hire people to make those decisions. And they need to find people who will make good decisions.
Six-digit salaries for top executives may sound outrageous, but they might also serve to attract extremely competent people. Under their leadership, the organization may find that this was a very worthwhile investment. Similarly, paying for expensive fundraisers and marketing campaigns might turn out to be worth it, earning them more money than they spent on this. If these funds had simply been used to provide services instead, the organization could find it has much less funding available for that purpose, due to unqualified management and dismal fundraising efforts. If acquiring more funding for their causes requires spending more money on marketing and directors, why shouldn’t they aim to maximize their available funding? It’s easy to get angry about a charity’s CEO making a million dollars a year. It’s not so easy to say that cancer research and health services for the poor should lose their funding because your sensibilities were offended.
Of course, this doesn’t mean that the expenses of salaries and fundraising should have no upper limit at all. There’s obviously a point where any further returns would be insubstantial and not worth the cost, and anything beyond that actually would be an unnecessary expense. Every charitable organization is responsible for striking a balance that’s appropriate to its goals. But even if they do manage to work out the best proportion of administrative overhead to maximize their funding, this still doesn’t show that they’re directing it toward a worthwhile goal. This isn’t always as easy to quantify, but it’s not hard to understand that efficiency is meaningless when you’re efficiently doing something wrong. “Wrong” is a concept that can be challenging to pin down, so let’s just consider a couple of especially striking examples.
The Toys for Tots Foundation claims to spend 98% of the donations it receives on providing gifts for less fortunate children. VillageReach provides vaccines in Mozambique, and is estimated to prevent one death for every $400-800 spent. If we have $800 to spend as we please, we can either give $800 worth of toys to a number of children, or we can give $800 worth of not being dead to someone in Africa. The choice is yours, but you do have a decision to make.
Going back to Mozambique, Remnant Publications reports: “They are hungry for the Word of God but cannot afford Bibles! The majority are fortunate to have even one meal a day. They need our help!” Indeed they do. In this situation, the numbers aren’t quite so important. For a starving person, no amount of Bibles can add up to the equivalent of food. Bibles are inedible, and for them to have any plausible purpose, their readers must first not be dead. It’s somewhat like trying to stop a flood by providing iPods instead of sandbags. Remnant Publications claims that every donation of $3 will ship one Bible to Mozambique. Knowing that $800 will prevent someone’s death, would you rather spend it on 260 Bibles or saving one life?
People make choices like these on a regular basis. They withhold their money from initiatives to provide food and vaccines – initiatives they may not have even been aware of – and instead spend it on Bibles or toys or the Make-a-Wish Foundation. Considering that this is how many people choose to allocate their donations on the scale of tens to hundreds of dollars, what the hell makes them think they’re qualified to manage the finances of a $400 million-a-year foundation?
To be clear – because some people tend to conflate these things – this does not mean that Komen’s current resource allocation is the best it could be, or even that it’s good. It does not mean that it isn’t possible for charity directors to be overpaid, or for marketing efforts to be excessive. It is not a defense of Komen’s litigation against other charities. It is not a defense of their senior VP Karen Handel, who believes that gay adoption should be outlawed and gay parents are less legitimate than straight parents. And it does not mean Komen was correct in rescinding their grants to Planned Parenthood. Those arguments can stand or fall on their own merits. But simply criticizing a charitable organization for having operating costs and paying its employees does absolutely nothing to show any kind of wrongdoing on their part. Overhead ratios don’t just give you an incomplete picture of an organization’s efficiency – they don’t tell you anything useful at all.